Will the Tax Bite Ease?

The day-to-day quest to lower the bite of taxes continues. Examination rates for the IRS now defy logic. For all individual returns the examination rate for tax year 2018 was 0.15 percent.[1]  For income over $100,000, progressing by categories to income over $10 million, the examination rate varied from 0.05% to 0.03% annually. This is where the money is. For incomes of zero, yes, that’s right, zero, the examination rate was 0.31 percent. Fraud, particularly regarding the earned income tax credit (EITC), causes the focus. Using the tax code for social engineering rather than collecting money does skew the system. Some other things require attention, but don’t get it.

Sometimes investment professionals offer this rather generic description of how they work: “we’re not market timers.” The kernel of truth is that it is very hard to make two good decisions regarding first, when to get out of the market and then second, when to get back in. Some stocks in the growth category are secular growth stocks, where “innovation can carry companies to growth almost independently of the economic or business cycle.”[1] On the other hand, value stocks, besides needing those two above-mentioned good decisions, “need an economic outlook conceptual framework over a multi-year forward time period to begin positing economic growth.”[2]

Sometimes investment professionals offer this rather generic description of how they work: “we’re not market timers.” The kernel of truth is that it is very hard to make two good decisions regarding first, when to get out of the market and then second, when to get back in. Some stocks in the growth category are secular growth stocks, where “innovation can carry companies to growth almost independently of the economic or business cycle.”[1] On the other hand, value stocks, besides needing those two above-mentioned good decisions, “need an economic outlook conceptual framework over a multi-year forward time period to begin positing economic growth.”[2]

The S&P 500 Index performed a most spectacular “V” in the first half of 2020, first falling 33.9% through its March 23rd low, then rallying 38.6% through mid-year. This performance included the steepest plunge and the fastest rally in 90 years.[1] The wild ride left the market still down 8.4% from its February all-time high and down 4% from the beginning of the year. The index returned 20% in the second quarter. Stocks rallied, anticipating a treatment for COVID-19 and an economic recovery turbocharged by both fiscal and monetary stimulus.

Remote Work and “Domicile”

If you and your family are handling estate tax planning by living in a low-tax state, then you’re familiar with “domicile,” the determination of a taxpayer’s true “home.” If your business operates in more than one state, then you are familiar with the term “nexus,” which can trigger state taxes depending on an evaluation of sales, physical location of offices, or even location of employees (“payroll”).

We’re in another financial crisis. In 1999-2000 it was a valuation of tech stocks bubble; in 2008-2009 it was a financial and banking solvency crisis; and beginning in March 2020 it is a medical/financial crisis where, as with an aggravated human immune system response, our reaction to the pandemic will cause great financial harm.

Market Performance
The first quarter of 2020 was a painful reminder that markets don’t always go up. After a near eleven-year bull market run that began March 9, 2009, the S&P 500 Index plunged 33.9% between the market peak on February 19 to the most recent price bottom on March 23.[1] Over this four-and-a-half-week stretch, we saw two of the worst single-day declines since the Great Depression began in 1929, selling off -9.5% on March 12 and -12.0% on March 16.[2] The COVID-19-related uncertainty led to the swiftest market meltdown on record at 22 days.[3] However, the final returns for the quarter weren’t as bad as one might think, due to the positive market returns running up to the peak and the significant 15.7% rebound off the bottom. The S&P 500 Index ended the quarter down -19.5 percent. The tech-heavy Nasdaq Composite Index was off a comparatively better -13.9% and the blue-chip, 30-stock Dow Jones Industrial Average was down slightly worse at -22.6 percent.[4]

Woodstock makes its own unique blend of sausage. It may not surprise you that each manager has his or her own opinions about the stocks that go into your portfolio. The stocks in your portfolio are drawn from a list of stocks that we collectively agree meet our standards for what constitutes high-quality growth stocks, and we commit to following fundamental developments at these companies closely. This list of companies comprises our Monitor List. We assign a manager to provide research coverage of each Monitor List stock, and as portfolio managers we are all free to draw from the entire list to determine the right holdings for your particular portfolio.

At Woodstock, 85% of our assets under management are in portfolios for which the benchmark is an 80% equity and 20% intermediate bond portfolio. We concentrate our attention on high-quality US equities. The process we go through with every client to assess their comfort with their asset allocation strategy partially involves determining their cash needs over the next twelve to twenty-four months. Does the client have enough liquid resources (cash or cash equivalents) to avoid selling stocks in a down market, if not desired for other reasons? On an individual client basis, it is making sure that liquidity is adequate to avoid making a bad long-term investment decision.

Understanding how safely or precariously one is perched financially is helpful in determining whether to remain calm or panic in a crisis. For those working Americans who expect to receive social security payments at retirement, it is calming to understand the magnitude of the commitment that you are making and will make to yourself under government direction. One example is a husband and wife, both age 45, expecting to receive $2,000 per month at retirement. An insurance company would have to set aside approximately $770,000 to provide the couple with that benefit, as the present value of those delayed payments. You will provide that funding over your working life. It is a substantial achievement.